Company Tax Issues
Steve Bond
Introduction
• Pressures on UK corporation tax revenue
• Two revenue-raising measures
• Clampdown on tax avoidance
• Tax increases on North Sea oil
International Pressures
• UK relies more on corporate tax revenues
than most developed countries
• Government projections show a significant
increase in corporate tax revenues
• International developments may make that
difficult to achieve
• Tax competition
• European Court of Justice
Trends in Corporate Tax Rates
• Clear downward trend in corporate income
tax rates in developed countries over last 20
years
• Gordon Brown cut the UK corporation tax rate
in 1997 and 1999, but no change since then
• Despite EU enlargement, and recent cuts in
Austria, Finland, Germany, Greece, Holland
Trends in Corporate Tax Rates
UK
G7
EU-15
1996
33
43.5
38.1
1999
30
39.8
35.9
2005
30
36.3
30.1
EU-25
26.3
Trends in Corporate Tax Rates
• 6 of the EU-15 countries now have a lower
corporate tax rate than the UK
• If downward trend continues elsewhere,
some doubt as to whether UK can sustain
30% corporation tax rate, and remain an
attractive location for international companies
European Court of Justice
• Another threat comes from the ECJ
• EU Treaty Articles enshrine non-discrimination,
free movement of capital, and freedom of
establishment
• Allow companies to challenge the legality of
national tax structures
• Increasing importance
• Particularly for international companies
European Court of Justice
• Already an important influence on recent reforms to
UK corporation tax
• Extension of transfer pricing rules
• Taxation of finance leases
• 2005 Marks and Spencer case
• Tax relief for losses made by some EU
subsidiaries
• But only in very limited circumstances
Current Challenges
• Cadbury Schweppes
• Challenge to application of CFC rules within EU
• CFC rules allow governments to tax subsidiaries
located in low tax jurisdictions directly
• Threat to UK revenue if this allows UK companies
to make more effective use of tax haven regimes
outside the EU
• By routing profits through EU countries with less
effective CFC rules
Current Challenges
• Franked Investment Income GLO
• Challenge to ‘credit system’
• Dividends received from overseas subsidiaries are
taxed, with credit for foreign corporate taxes paid
• Dividends received from UK subsidiaries are not
taxed
• If this challenge succeeds, UK could either adopt
an exemption system for foreign-source dividends
• Or apply UK corporation tax to dividends received
from UK subsidiaries
The Squeeze on Corporate Tax Revenue
• International developments question the
sustainability of current level of corporation
tax receipts
• Non-North Sea corporation tax raising 2.9%
of national income in 2005-06
• Government medium term projections show
that increasing to 3.3% of national income
• May prove difficult to achieve, or risk having a
detrimental impact on investment in the UK
Revenue-raising Measures
• This background provides some insight into
recent measures designed to increase
corporate tax revenues
• The tax avoidance agenda
• Tax increases on North Sea oil
Tax Avoidance
• Clear increase in Government efforts to tackle
tax avoidance
• Measures announced since 2002 Budget
alone estimated to raise £4.5bn this year
• Important developments include
• 2004 statement by Paymaster General
• Tax Avoidance Disclosure rules
• ‘Tax in the Boardroom’ agenda
Closing the ‘tax gap’
• ‘Tax gap’ – between what the authorities
actually collect, and what they estimate they
should be collecting
• New anti-avoidance measures are continually
needed to prevent gap widening, as new
avoidance schemes are developed
• But current initiatives seem to be aimed at
narrowing the gap
Changing the terms
• Traditional distinction between illegal tax
evasion and legal tax avoidance or tax planning
• Some forms of avoidance are now tarred with
some of the disapproval traditionally reserved
for evasion
• Imprecise distinction between acceptable and
unacceptable forms of tax planning
2004 Statement by PMG
• Crackdown on schemes to avoid tax and
NICs on rewards from employment,
particularly City-style bonus payments
• Threat to apply anti-avoidance legislation
retrospectively, should future schemes
‘frustrate our intention that employers and
employees should pay the proper amount of
tax and NICs on the rewards of employment’
Tax Complexity and Tax Avoidance
• Relatively simple to apply this approach to
employee earnings, where nature of the tax
base is relatively straightforward to define
• Much harder in cases like business profits,
where the (UK) tax base is much harder to
specify
• Complexity breeds opportunities for
avoidance
Tax Complexity and Tax Avoidance
• Complex legislation leaves more room for
dispute about the intention of the law
• And for creative attempts to find
arrangements that fall within the letter of the
law, if not its spirit
• Hence unsurprising that tax avoidance is a
big issue in areas such as the taxation of
international companies and the financial
sector
Tax Avoidance Disclosure
• Introduced in 2004, and subsequently
strengthened
• Requires early disclosure to tax authorities of
certain kinds of tax planning schemes
• Had produced around 600 direct tax
disclosures and 750 indirect tax disclosures
by autumn 2005
• And raft of blocking measures in 2005 Budget
and 2004 and 2005 Pre-Budget Reports
Tax Avoidance Disclosure
• Clearly working from Government’s
perspective
• Generating information needed to take action
• Cost is an outpouring of targeted antiavoidance measures
• Taxpayers, and especially companies, must
ensure their arrangements do not fall foul of
these additional provisions
‘Tax in the Boardroom’ Agenda
• Attempt by HMRC to raise awareness among
senior management of large companies of
risk to their reputation
• HMRC officials wrote directly to chairmen of
UK’s largest 500 companies in autumn 2005
• Seeking greater dialogue over management
of tax issues and ‘tax risk’
‘Tax in the Boardroom’ Agenda
• Perception that HMRC is seeking to increase
pressure on companies by raising questions
about tax strategies at boardroom level
• Emphasis on ‘tax risk’ looks like an attempt to
increase uncertainty about the borderline
between acceptable and unacceptable forms
of tax planning
‘Tax in the Boardroom’ Agenda
• This may succeed in raising revenue in the
short term, but at what cost?
• One of the attractions of the UK as a location
for internationally mobile companies and
individuals is its reputation for efficient and
transparent tax administration
• Any damage to this reputation may be difficult
to reverse
Tax Avoidance Initiatives
• Tension between demands that companies
pay their ‘fair share’ of taxation, and aim for a
globally competitive tax system
• Barrage of targeted anti-avoidance measures
may contribute to former objective, but risks
undermining the latter
• Extension of this approach can nevertheless
be expected in the 2006 Budget
North Sea Taxation
• Significant recent increases
• 2002: 10% supplementary rate of
corporation tax; reform raised around
£0.5bn per year
• 2005: change to timing of tax payments;
one-off gain of £1.1bn in 2005-06
• 2006: increase in supplementary rate of
corporation tax to 20%; raises around £2bn
per year from 2006-07 onwards
2002: Structural Reform
• 2002 reform introduced a desirable structure
for the taxation of new fields
• Single tax, corporation tax, at 40% rate
• 100% first-year allowance for investment
• Broadly neutral impact on investment
decisions, so long as investors believe tax
rate will remain constant
• Fear of a rising tax rate is bad news for
investment; tax rate on future profits higher
than current tax relief for investment spending
2005: Opportunistic Tax Hikes
• 2005 Budget: brought tax payments forward
• Main effect was to shift a £1.1bn instalment
payment from April 2006 to January 2006
• Conveniently boosting revenue for 2005-06
2005: Opportunistic Tax Hikes
• 2005 Budget: brought tax payments forward
• Main effect was to shift a £1.1bn instalment
payment from April 2006 to January 2006
• Conveniently boosting revenue for 2005-06
• Only a cynic would think this had anything to
do with meeting the Golden Rule
2005: Opportunistic Tax Hikes
• 2005 Pre-Budget Report: corporation tax rate
for North Sea operations raised to 50%
• More significant and permanent tax increase,
raising around £2bn per year from 2006-07
• Impact on investment comes not so much
from the 50% tax rate, but from the fear that
the North Sea is now seen as a soft target for
further tax increases
Striking a Balance?
• Budget 2002: ‘a regime that raises a fair
share of revenue and encourages long-term
investment’
• 2005 Pre-Budget Report: ‘striking the right
balance between producers and consumers
… to promote investment and ensure fairness
for taxpayers’
A Secure Basis for Planning?
• Budget 2002: ‘a more secure basis on which
companies can plan for the future’
• Two tax rises in the last year alone!
• 2005 Pre-Budget Report: ‘there will be no
further increases in North Sea oil taxation
during the life of this Parliament’
• Unclear how far this promise will go towards
restoring investors’ confidence in the North
Sea tax regime
Conclusions
• Tax increases on North Sea oil and gas, and
more aggressive stance on tax avoidance,
are part of a campaign to sustain and if
possible increase corporate tax revenues
• International developments are pushing in the
opposite direction
• Very difficult to balance this aim with desire to
maintain an internationally competitive tax
system